10-Year Treasury and Market Volatility

By Dean Barber

June 6, 2019

One thing is for certain; May was an exciting month overall – we have some updates on the 10-year Treasury, tons of news, lots of talk about the trade war with China, lots of talk about this new trade tariff deal that Trump is threatening on Mexico, and the markets are in a turmoil for May.

May Market Volatility

Figure 1 Source:

Let’s take a really quick snapshot of what we saw happen just in the month of May in Figure 1. When we look at this chart, we see that gold was the only thing that did reasonably in May – up 0.5%. The Dow Jones Industrial Average and the S&P 500 both went down about 5.5%. The iShares Russell 1000 growth down 5.63%, crude oil down 7%, and then the NASDAQ off by 7.38%.

One that we’re going to talk about a little more extensively here is the yield change on the 10-year Treasury. We saw an 11% drop in the yield change, and we’re going to get to what that is today. The month of May was obviously not a good month.

Markets Year-to-Date

10-Year Treasury - 2019 YTD

Figure 2 Source:

Let’s take a step back and let’s look at year-to-date in Figure 2. So, year-to-date, you see oil up 27%. You see the iShares Russell 1000 growth up 11% and the NASDAQ up 10.27%. You’ve got the S&P 500 up 9.25% and the Dow Jones Industrial Average up about 6%. Gold is up just about 3% on the year, but again, you’ve got that 10-year Treasury yield down 20% from where the 10-year Treasury was at the beginning of the year.

Markets Over the Last 12 Months

10-Year Treasury - Last 12 Months in Markets

Figure 3 Source:

But let’s back up the lens a little more and look over the last 12 months in Figure 3. Okay, so May was exciting, but not near as exciting as what we’ve seen happen over the last 12 months. Believe me; I don’t like it. I don’t like all the volatility, and I know you don’t like all the volatility either. But I think it’s here to stay for some time and we’ll get into why I think that’s the case here in just a minute.

If you look over the last 12 months, you’ve got one asset that seems to be in positive territory on a solid level, and that’s gold. That’s 12 months and everything else you’ve got, you know, .8% on the iShares Russell 1000 growth, you’ve got .43% on the Dow Jones Industrial Average, the S&P 500 up about .15%, and then the NASDAQ down 3% over the last 12 months. You have crude oil down 10%, and again, the Treasury yield declined by 25.95% over the last 12 months. If you took a snapshot of where we were a year ago and where we are today, and you woke up a year later, you would think it had been a pretty boring time.

But as you look at this chart, you can see there was nothing boring about what was going on here as there are all kinds of volatility and I think that volatility is here to stay.

10-Year Treasury and Market Volatility

10-Year Treasury - 10 Year to 3 Month Treasury Yield Spread vs SP500

Figure 4 Source:

Here’s one of the reasons why I think that. In Figure 4, I’m going to take a couple of minutes and explain a chart here. At the top, I’ve got the 10-year to the 3-month Treasury yield spread, which means how much higher is the yield on the 10-year Treasury versus the 3-year Treasury. There have been three times where it inverted and went negative. So, this bottom line across here is where we’re looking at the yield curve turning negative. So, come back in here during the 2001 and 2000 timeframe.

You saw this go negative, and every time that this has happened where this has gone negative since 1955, there has been an economic recession that followed. Now in this particular case, there was a few months later, and this shaded area notes the economic recession. Below this chart is the S&P 500. So, you can see from the time that the 3-month Treasury went negative, as far as the spread to the 10-year, the S&P 500, in this case, started to decline almost immediately.

Of course, this was through 2001 and 2002 and into the early part of 2003, where we saw almost a 50% retracement in the S&P 500. That yield curve went negative again. The 10-year Treasury to the 3-month spread went negative again here in 2006, and it was a little early. There was still some room for growth in the market here. But eventually, that recession did come and then we had a 55% or so retracement on the S&P 500. That yield curve inverted again. We talked about this, but I think it’s important for you to see in a charted format. This way you’ve got the markets below what’s happening with the yield spread.

What Does this Mean Today?

So, we’re further than this -.12% today, and you’ll see that here in just a minute. But here’s where we are today, and this has happened again. So, the question is, at what point does this recession come in? It’s happened 100% of the time since 1955. I can’t tell you for certain that that means that there’s going to be a recession. However, a lot of things are pointing towards the fact that we are at the end of a growth cycle.

There’s nothing to be feared, as I said last month, but it’s something that we need to understand so that we can make sure that you’re prepared for it. If we take a look at where the markets are today, we have to ask ourselves the question, “Is this volatility that we’re seeing over the last 12 months, (FIGURE 4) is that similar to the volatility that was going on back in 2007, early part of 2008, and back in the early part of 2000 and 2001 before the actual recession hit?”

Money Velocity

10-Year Treasury - Housing and Money Velocity Since 2000

Figure 5 Source:

Another interesting thing here is existing home sales, Figure 5, 30-year mortgage rates, the velocity of money, and the 10-year Treasury rate change, and this is going all the way back to 2000. You see the blue line is the existing home sales and how everything really peaked out here in 2006 and 2007. Then a crash down into the Great Recession. We’ve seen a decent recovery in existing home sales, but look at this chart, you have 19 years here, and the existing home sales are almost exactly where they were back in 2000. The 30-year mortgage rates 52% lower than what they were in 2000, and the 10-year Treasury yield is 64% lower than where we were back in 2000.

The one that doesn’t get talked about a lot but I’ve mentioned it in a couple of videos before is this velocity of money. Now velocity of money is what causes inflation, and it’s really what is the engine of our economy. It’s how many times per year does a dollar change hands. You can see that since 2000, the velocity of money has been in a steady decline. What that’s relating to is that the baby boomer generation controls the people that have the vast majority of the wealth.

That generation is busy saving for retirement, paying off debt, or they’re already retired. They’re not interested in spending a ton of money- that’s en masse, it’s not everybody, but en masse. And so that velocity of money continues to be low, which makes it hard for the economy to really gain a lot of steam. When you start seeing things like this inverted yield curve, and you still have that money velocity declining, it can lead to some concern.

U.S. Bonds Compared Globally

U.S. Bonds

10-Year Treasury - US Bonds

Figure 6 Source:

Okay, we’re going to switch gears here just a little bit. What we’re looking at in Figure 6, is as of June the 2nd, the yields on the 1-month, 3-month, 6- month Treasury and I want you to focus on the 10-year Treasury yield. Here’s your 1-year Treasury yield. Your 1-years are now yielding higher than your 10-year, obviously, so is the 6-month, so is the 3-month, and so is the 1-month. So, we definitely have an inversion, and we haven’t seen the 10-year Treasury yield this low for almost two years now. Again, when you start seeing that longer-term Treasury decline, it is a sign that the longer-term outlook for the economy is softening. We have it pretty good here in the United States, though.

German Bonds

10-Year Treasury - German Bonds

Figure 7 Source:

Take a look at Germany, in Figure 7. These are German government bonds. Their 1-year all the way out to their 10-year and you notice this little minus in front of all these. German bonds are yielding a negative return all the way out to the 10-year German bund.

French Bonds

10-Year Treasury - France Bonds

Figure 8 Source:

Let’s take a look at France, in Figure 8. France is yielding negative all the way out to the 8-year bond.

Japanese Bonds

10-Year Treasury - Japan Bonds

Figure 9 Source:

Let’s take a look at Japan, in Figure 9. Japan is yielding negative all the way out to the 10-year.

Negative Interest Rates Around the Globe

We wrote a blog here two or three weeks ago called Negative Interest Rates Around the Globe. It details the fact that there are now $10 trillion that are on deposit with foreign governments at negative returns. That means that people are willing to put their money on deposit with that government and willing to accept less back because they feel that that is safer than anything else that they can do with their money. So that’s their safe money ideas. I’m telling you, this is not normal at all to see $10 trillion on deposit with negative yields. So, we combine that with what we see with the 10-year to the 3-month Treasury spread that we talked about a few minutes ago.

What it does is it tells us that we should continue to be very cautious. Don’t get caught up in everything that’s happened so far this year, and think, oh, everything’s going to be just fine. Look, long term, everything always is fine. But you have to always keep in perspective, what’s happening in the world, what’s happening in the economy.

Our Investment Strategies

Here at Modern Wealth Management, we apply all of the different types of investment strategies to your portfolio, and we do it in conjunction with your overall financial plan. We try to create the portfolios that you have today so that they line up with what your expectations and especially your long-term needs are. I encourage you to keep the dialogue open with your advisors and talk to them about your asset allocation, understand what the mix is, and understand what it looks like. For the most part, we’ve come through the last 12 months, and most of our clients, their plans are still showing a very high probability of success.

We’ve seen a little bit of change, but nothing alarming whatsoever. You know, there are different types of strategies that we run here at Modern Wealth Management. We’ve got tactical, we’ve got active, and we’ve got passive-all three of those different types of strategies have done different things over the last 12 months. Some have done better than others, and some have done a little bit worse than others. Typically, we combine those to try to smooth out the rest as much as possible. But when you get into situations like what we’ve been in over the last 12 months, smoothing that ride isn’t always possible. But what we want to do is know that we’ve got things in place to prevent catastrophic losses, which can destroy your ability to either get to retirement or through retirement.

Talk to Us, We’re Here to Help

I encourage you to keep the dialogue open. We’re here. Give us a call and make sure that we know what’s on your mind. I’ll continue to do these videos for you to make sure that we’re the things that we’re seeing. Thanks so much for joining me and I’ll talk to you again in about a month. If you’re looking for a second-opinion or looking to stress-test your portfolio for the future, schedule a complimentary consultation below or give us a call anytime at 913-393-1000.

Dean Barber
Founder & CEO

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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.